WHAT IS “INCOME?”

“Income,” a benign term that on its face appears to be relatively simple. As detailed below, determining income for a party in a Colorado divorce can be complicated.

Before the recent amendments to Colorado’s law on maintenance, C.R.S. 14-10-114, it was unclear how a court should determine income for cases where long-term, i.e. permanent, maintenance was requested or the parties annually made $75,000 in total. Colorado divorce attorneys relied on inferences in the maintenance statute to the more specific definition of income for child support and cases such as In re Marriage of Swing. And even relying on the definition of income for child support proved to be problematic when a party was self-employed or was part of a partnership or closely-held corporation.

Fortunately, however, the General Assembly clarified what exactly is “income” in determining both maintenance and child support in Colorado. Starting on January 1, 2014, the amount of income that is used in the Child Support Worksheet or Maintenance Guidelines is the same.

Gross vs. Net Income

The first concept that must be understood is the difference between gross and net income. Gross income is before taxes and deductions like health insurance or 401(k) contributions are taken out. Net income is the money left after taxes and deductions; the amount a salaried employee gets if they do direct deposit. In Colorado, gross income is what matters for maintenance and child support.

“Gross income” includes the following:

• Income from salaries
• Wages
• Tips declared to the IRS or imputed by the court
• Commissions
• Payments received as an independent contractor
• Bonuses
• Dividends, capital gains, trust distributions, annuity payments and interest
• Rents
• Social security, workers comp, and disability benefits
• Gifts, including from family members
• Expense reimbursements or in-kind benefits such as free housing, food, transportation, etc.
• Moneys drawn by a self-employed individual for personal use that are deducted as a business expense

The above is not an exhaustive list. And income does not include child support payments received, or money received from additional jobs or work beyond 40 hours per week.

Self-Employed Income

Things get tricky when a party is self-employed or involved in a partnership or closely-held business. Generally, income for someone self-employed or an owner of a small business is calculated by taking the gross receipts/revenue and subtracting “ordinary and necessary expenses.” That last term is where parties frequently disagree on whether an expense is a legitimate business deduction. The debate doesn’t end with a cursory review of a tax return.

People frequently run much of their personal expenses through their business because the risk of an audit by the IRS is somewhere in the neighborhood of 1%. For example, a self-employed project manager may deduct his entire monthly cellphone bill or gas expenses even though he undoubtedly uses his cell phone for personal use, or drives up to Aspen on a weekend to ski. He may not get caught by the IRS, but a competent Colorado divorce lawyer will successfully argue that his income is higher for analyzing maintenance and child support.

Finally, the amendments to Colorado law clarify how income is determined for a “silent partner” or someone that owns part of a business, but isn’t a manager. In that scenario, income for maintenance and child-support purposes may be limited to actual cash distributions. That income may be lower than merely taking the gross revenue of the company and reducing by ordinary business expenses.

Imputed Income for Underemployed or Unemployed

Voluntary unemployment is when an award of spousal maintenance or child support is based on imputed income that is not actually being earned by a parent or former spouse. The same concept applies whether the person is completely unemployed or working below their true earning capacity, i.e. “underemployed.” Voluntary unemployment frequently comes up in Colorado divorces where maintenance is at issue or any case involving child support.

Both parents are obligated to support their children. If one parent isn’t earning as much as they could, the child suffers. A party may lack the initiative to find or keep work. They may be purposefully turning down work to spite the other party. Whatever the reason, they are shirking their obligation to support the child. The policy of spousal support vis-a-vis maintenance (alimony) is no different.

Examples

The dispute comes down to (a) whether a parent is making less than what they should be, and (b) what is the potential income for the parent. A few examples may help.

• In re Marriage of Bregar – court imputed income to former lawyer who had started a cattle ranch.
• In re Marriage of Yates – imputed income based on former pay rate when father was involuntarily terminated from job, but turned down jobs that required travel.
• In re Marriage of Elmer – licensed attorney imputed income because he decided to pick apples at $10/hour.
• In re Marriage of Zisch – mother with teaching certificate was imputed income even though she testified that she was actively looking for a full-time teaching position.

Exceptions

Under Colorado law, there are a few notable situations where a court cannot impute income based on a parent or former spouse being unemployed. These exceptions are listed below:

1. A party is physically or mentally incapacitated.
2. A parent is caring for a child under the age of 30 months.
3. A parent that is in prison for 1+ years.

Similarly, a party will not be underemployed if:

1. They’re working in a position that is temporary and reasonably intended to result in higher income in the foreseeable future; or
2. Their job is a good faith career move that isn’t intended to deprive the other party of child support. The lower position cannot unreasonably reduce the support available to a child; or
3. They’re in an education program that will likely result in higher income within a reasonable period of time.

Calculating Imputed Income

Colorado law is fairly specific in determining a party’s income. How should a court calculate income when a party is unemployed or underemployed? Case law suggests that a court can use past earnings, education level, or wages of an average person with similar qualifications in finding the appropriate amount of income for calculating child support or maintenance.

Colorado divorce attorneys have multiple arrows in their quiver when handling a case involving allegations of underemployment or unemployment. Using employment statistics from the department of labor or formal discovery requests can break a case. Familiarity with the judge presiding over the case will drive the strategy behind the presentation of evidence and line of argument.

If you are searching for experienced, creative, and effective legal counsel, call a member of Kalamaya | Goscha to discuss your situation.